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Funds need to come from somewhere, and save for additional taxes, the only remaining option is more debt, a measure that will surely cause alarm among international rating agencies and the International Monetary Fund

The government of Prime Minister Najib Mikati is once again facing a new dilemma: How to secure funds for the salary hike for public sector employees without raising taxes or widening the budget deficit.

The truth of the matter is that they can’t. Funds need to come from somewhere, and save for additional taxes, the only remaining option is more debt, a measure that will surely cause alarm among international rating agencies and the International Monetary Fund.

Allocating more funds for the salary hike will cost the treasury an additional $1.2 billion, causing the deficit to rise much higher than the projected 26 percent at the end of 2012. “They [Cabinet] can partially raise taxes and allow the deficit to rise. So what’s the big deal?” Ghassan Diebah, a professor of economics and finance at the Lebanese American University, told The Daily Star. Diebah added that some politicians and ministers make comments about the budget as if they have just discovered gunpowder. “Why are they making such a big fuss about the issue of a salary increase? How can they raise salaries without raising taxes?” Diebah asked.

Finance Minister Mohammed Safadi’s original draft budget called for raising the value added tax to 12 percent from 10 percent, increasing taxes on interest revenue on deposits to 8 percent from the current 5 percent and hiking taxes on real estate transactions. But Mikati shelved that bill, suggesting instead an unimaginative and bland budget which includes no significant tax increases.

Mikati’s proposal, which was initially approved by the government, was an apparent bid to appease both the General Labor Confederation and the private sector, which threatened to take to the street if the Cabinet raised taxes.

Observers say that Mikati does not want to conclude his term in office with high taxes as this would hurt his chances of being re-elected after the 2013 parliamentary polls. Sources say the prime minister will likely order the issuance of treasury bills to finance the salary increase, but even this measure would cause the deficit to soar since the size of the public debt will jump by more than $1 billion a year.

They add that Mikati will sooner or later bow to the pressure of teachers and civil servants who staged a sit-in near the Grand Serial Wednesday in a show of force.

Both public and private school teachers have threatened to stage a nationwide protest if salaries are not increased soon. Furthermore, some of the leaders of the labor unions have called on the government to step down in 10 days if the salary scale is not endorsed.

Head of the GLC Ghassan Ghosn stressed that Cabinet will either cover the salary hike with direct taxes or let the deficit and debt soar. “I don’t think the government has too many choices. I don’t mind if the government raises taxes, but as long as it spares the poor and hits the rich,” Ghosn said. He added that the time has come to slap more taxes on companies and individuals that make huge incomes.

Economy and Trade Minister Nicolas Nahas said the government refused to be blackmailed by any group, noting that any hike of public sector salaries should be studied carefully in order to assess the ramifications of such a measure. “We are not against raising the salaries of civil servants, but some associations are making new demands which are a bit unrealistic. We have already accepted 80 percent of the demands of teachers. What more do they want?” Nahas asked.

The private sector reiterated its rejection of any tax increases, claiming that the economy was already suffering from an acute recession. Firms and business leaders want the government to cut waste, reduce unnecessary spending and improve tax collection instead of hiking taxes.

“The private sector always talks about cutting waste and reducing government spending. Let them show us how this can be done. Let them give us some examples,” Diebah said. He said there was no choice but to raise taxes such as those on interest revenue on deposits and on capital gains and profits.

Paris III donors and the IMF urged the government of then-Prime Minister Fouad Siniora to raise VAT to 15 percent and hike taxes on interest revenue on deposits, cautioning that if the authorities continued to overspend without control the public debt would become too difficult to manage.